Active equity mutual funds experienced more than $1 trillion in outflows in 2025 — the 11th year of net outflows and the steepest of the cycle. By contrast, passive equity exchange-traded funds attracted more than $600 billion.
For years, Wall Street has warned of an impending crisis. The narrative goes like this: As more investors abandon active management for passive index funds, price discovery will deteriorate, markets will become less efficient, and opportunities for skilled stock pickers will multiply. It’s a seductive theory that conveniently supports the active management industry’s business model.
There’s just one problem: Reality refuses to cooperate.
The concern about passive investing destroying market efficiency sounds logical at first. Active managers argue that index funds are “price takers” rather than “price makers,” simply buying whatever is in the index without analyzing fundamentals. As passive (systematic) strategies capture
